I am a senior editor at Forbes, covering legal affairs, corporate finance, macroeconomics and the occasional sailing story. I was the Southwest Bureau manager for Forbes in Houston from 1999 to 2003, when I returned home to Connecticut for a Knight fellowship at Yale Law School. Before that I worked for Bloomberg Business News in Houston and the late, great Dallas Times Herald and Houston Post. While I am a Chartered Financial Analyst and have a year of law school under my belt, most of what I know about financial journalism, I learned in Texas.

DOJ's Opening Shot On American/USAir Merger May Be Last One

The government’s lawsuit to block the pending merger of American Airlines with USAir is a good one, so good that the carriers may have difficulty salvaging the $11 billion combination without surrendering many of the routes that justified it in the first place.

Despite the protestations of USAir Chief Doug Parker that “we will fight them,” antitrust experts I spoke with said the fact a lawsuit was filed at all means the government really, really doesn’t like this deal. In most mergers where the government raises objections, the two sides settle the matter by agreeing to concessions such as selling off operations.

“It’s not that frequent where the government concludes that the combination is so anti-competitive that it feels the need to block the whole deal,” said Michael Swartz, a partner with Schulte Roth & Zabel who frequently deals with antitrust questions in mergers and acquisitions.

The Justice Department has gathered “very strong, compelling empirical evidence” that further consolidation at the top of the airline industry will allow the remaining carriers to collude on fares and “ancillary fees,” those annoying fees that are proliferating for everything from baggage to a couple of inches of extra legroom, said Diana Moss, an economist with the American Antitrust Institute. “Instead of just competing hard against each other, they will tend to coordinate with other.”

In its lawsuit, the government cites public statements by executives as well as internal memos to support the allegation that reducing the Big Four airlines to the Big Three will lead to excess concentration on thousands of routes. The DOJ also says the merger would likely lead USAir to abandon its low-price Advantage Fares strategy, citing an internal document from American saying just that: Advantage Fares “would have to be eliminated in a merger with American, as American’s large non-stop markets would now be susceptible to reactionary pricing from Delta and United.”

The fact that American parent AMRAMR is just emerging from bankruptcy, and the airline industry has been stuck in a pattern of serial insolvency for decades driven partly by cutthroat competition, doesn’t matter, said Jonathan Lewis, a partner with BakerHostetler in Washington.

“Just because you go bankrupt doesn’t give you a pass,” Lewis said.

For the record, the government doesn’t think American needs to combine with USAir to stay out of bankruptcy. The airline has ordered the largest fleet upgrade in history and a completely different cost structure than it had going into bankruptcy, Lewis said, making arguments it needs to combine with USAir for its health easy to refute.

There is the question of whether American/USAir really could do all the bad things the government accuses it of. Challenges under the Clayton Act are necessarily foward looking, and Swartz said the government has plenty of “natural experiments” to demonstrate how fares and charges have gone up in some markets after previous mergers like the combinations of Delta and Northwest in 2008, followed by United and ContinentalContinental and onetime upstart Southwest with AirTran. This last merger ended Southwest’s role as fare-cutting disrupter in most markets, Moss said. Its fares are frequently higher than the majors.

“As concentration grows in the industry, it’s harder for-low cost carriers to work their maverick strategy,” Moss said, due to the inability to get gates and takeoff slots at popular hubs.

Not everyone believes the government will be able to kill this merger, like it did AT&TAT&T‘s proposed takeover of T-Mobile in 2011.

“The DOJ has this one absolutely wrong,” said Robert McTamaney, a partner with Carter Ledyard & Milburn in New York who frequently advises airlines and other companies on the antitrust issues in mergers and acquisitions. The essential question, he said, is whether American/USAir would have the power to dictate prices any more than the two airlines operating separately.

“They have to have a pricing power that can’t be answered by other competitors,” McTamaney told me, and given the portability of airliners and ease of jumping into and out of markets, that’s not likely. Under Section 7 of the Clayton Act, he said, the government has to show that the new airline would have the power to resist competition from at least one of its “substantial competitors,” and that’s not likely to happen here with three major international carriers and Southwest.

“This is a merger to a quadropoly,” he said. “Is there less competition likely than in a sextopoly? Probably. But a quadropoly still has four strong players.”

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How can anyone think this is about having only 3 or 4 strong players? Do they mean domestically? Because we’ve seen Southwest, Jetblue, Spirit, Virgin, Alaska etc. have great success domestically for the past two decades. These airlines have achieved great success competing against the legacy carriers in the domestic market. It comes down to this, is our government going to get out of the way and untie the hands of our 3 or 4 legacy carriers and allow them to compete against foreign carriers on at least somewhat of a level playing field on routes in and out of the U.S. American citizens have many,many choices when it comes to air service. And once again, the airlines are not a utility, they are businesses which must compete in perhaps the most competitive industry in the world. Nice Job DOJ.

Each merger is judged on it’s own merits, therefore forget about other airline mergers. This has to do somewhat with what is taking place now in the airline industry, i.e. the additional fees that have been added to passengers and millions of dollars a years that have generated by airlines over the past few years which leads to THE most important point.

The one glaring red-flag of this merger which USAIR is going to regret is the actions by their CEO Doug Parker who forwarded that email to a rival airline in an attempt to “collude” with a rival airline about the triple miles promotion.

COLLUSION is an illegal agreement between two or more parties, therefore secretive, to limit open competition by deceiving or misleading.

Doug Parker is alleged to have forwarded an email to a rival airline CEO about how bad a “triple miles” promotion was for the airline industry profitability. I was shocked to read this because many large companies make it VERY clear in their training to employees that such attempts to collude could be potentially illegal.

In 2010, one of US Airways’ larger rivals extended a “triple miles” promotion that set off a market share battle among legacy carriers. The rival airline was also expanding into new markets and was rumored to be returning planes to its fleet that had been mothballed during the recession. US Airways’ CEO complained about these aggressive maneuvers, stating to his senior executives that such actions were “hurting [the rival airline’s] profitability – and unfortunately everyone else’s.”

US Airways’ senior management debated over email about how best to get the rival airline’s attention and bring it back in line with the rest of the industry. In that email thread, US Airways’ CEO urged the other executives to “portray these guys as idiots to Wall Street and anyone else who’ll listen.”

Ultimately, to make sure the message was received, US Airways’ CEO forwarded the email chain—and its candid discussion about how aggressive competition would be bad for the industry—directly to the CEO of the rival airline. (The rival’s CEO immediately responded that it was an inappropriate communication that he was referring to his general counsel.)

That my friends is the one thing that the Justice Department does take extremely seriously and may be the straw that broke the camel’s back and differentiates this merger from all of the other mergers. When it comes to Anti-Trust matters, in any industry in the which involves collusion and the Justice Department is involved. It is the beginning of the end of any merger and not a negotiating tactic. That’s not an opinion. That’s a fact.

So when anyone wants to know why this merger is different than any other airline merger, or why this merger won’t go through, or in the end why this merger didn’t go through; they can thank Doug Parker for showing his true colors.